The  Facts  About  the 
Small  Loan  Business 

And  the  Scientific  Rate 
of  Fair  Charges 


BY  V     ^ 

REGINALD   HEBER   SMITH 

of  the  Boston  Bar 


Published  by 

American  Industrial  Lenders' Association 

HARRISBURG,    PENNSYLVANIA 


10  Cents  Per  Copy 


Copyrighted,  1922,  by 
Reginald    Heber    Smith 


o<H^ 


The  Facts  about  the  Small  Loan  Business  and 
the  Scientific  Rate  of  Fair  Charges 


The  following  memorandum  was  submitted  to  the  Committee  on  Legal  Affairs,  of 
the  Massachusetts  General  Court  (Legislature)  in  March,  192 1,  as  Counsel  for  the 
Legal  Reform  Bureau  to  Eliminate  the  Loan  Shark  Evil,  Inc.,  New  York. 

A.  The  Loan  Shark  and  the  Era  of  Darkness 

Ten  or  fifteen  years  ago  it  would  have  been  impossible  to  present  a 
comprehensive  statement  of  facts.  Nothing  was  known  about  the  small 
loan  business  except  that  it  had  produced  and  was  controlled  by  men  who 
operated  without  the  law  or  in  defiance  of  law,  who  charged  barbarous 
rates  of  interest,  and  who  earned  for  themselves  the  obnoxious  title  of 
"loan-shark." 

From  time  to  time,  in  different  communities,  little  groups  of  earnest 
and  sincere  people  would  wage  an  "anti-loan-shark  campaign."  There 
would  be  a  great  hue  and  cry  in  the  newspapers.  These  campaigns  were 
designed  "to  oust  the  loan-shark"  and  "to  prevent  the  poor  man  from 
paying  excessive  rates  of  interest." 

These  people,  though  well-intentioned,  knew  nothing  about  the  busi- 
ness. Instead  of  ascertaining  the  facts  of  the  situation  they  were  guided 
by  hysteria  and  false  sentimentality.  What  they  were  trying  to  do,  although 
they  did  not  realize  it,  was  to  prohibit  the  poor  man  from  borrowing. 

They  failed.  The  loan-shark  evil  grew  to  vast  proportions.  The  laws 
were  flouted.  The  borrowers  were  shamefully  oppressed.  The  situation 
everywhere  drifted  steadily  from  bad  to  worse. 

B.  Study  and  Research  about  the  Business 

Since  1910  a  steadily  increasing  number  of  persons  have  studied  the 
small  loan  business  in  order  to  find  out  what  was  the  matter  and  to 
suggest  constructive  reforms  that  would  accomplish  something.  Pioneer 
in  this  field  was  the  Russell  Sage  Foundation  which  established  a  Division 
of  Remedial  Loans.  Later  came  the  Legal  Reform  Bureau  to  Eliminate 
the  Loan-Shark  Evil.  There  were  also  legislative  investigations,  as  in 
Massachusetts  and  Illinois,  and  studies  made  by  students  of  economics 
and  sociology. 

In  this  way  the  facts  became  known.  This  new  group  of  reformers  had 
the  courage  of  their  convictions.  They  stood  by  the  truth.  They  incurred 
desperate  opposition  from  the  loan-sharks  and,  unfortunately,  from  many 
of  the  good  elements  in  the  community  who  had  never  learned  the  lesson 


5657,90 


of  their  own  failure  and  still  believed  that  all  you  had  to  do  was  "oust  the 
loan-shark." 

But  these  new  reformers,  armed  with  their  facts,  got  results.  First 
one  state  and  then  another  was  persuaded  to  try  their  plan  for  regulating 
the  small  loan  business.  When  the  plan  was  tried  it  succeeded.  Where 
the  loan-shark  was  driven  out  he  was  out  for  good.  Under  the  new  plan 
no  complaints  were  heard. 

Today,  those  who  have  taken  the  pains  to  inform  themselves  about 
the  small  loan  business,  know  that  there  is  a  plain,  straightforward, 
simple  solution  for  the  "loan-shark  problem."  The  solution  works  because 
it  is  practical  instead  of  theoretical,  it  has  been  worked  out  by  intelligence 
instead  of  by  hysteria;  in  a  word,  it  stands  four-square  with  the  facts  of 
the  situation. 

C.  The  Controlling  Facts 

The  fundamental  facts,  which  can  now  be  proved  beyond  the  shadow 
of  a  doubt,  are  these. 

I .   The  Small  Loan  Business  is  a  Necessity  for  the  Borrower. 

Careful  studies  have  been  made  to  find  out  what  sort  of  people  borrow 
and  what  they  borrow  for. 

For  a  long  time  it  had  been  assumed,  and  many  people  still  believe, 
that  the  borrowers  are  "drunks"  and  "bums"  who  borrow  to  get  drunk 
or  for  other  evil  purposes.   The  actual  facts  are  the  exact  reverse. 

In  1914  the  transactions  of  the  Atlanta  Loan  and  Saving  Company 
were  examined  and  it  was  found : 

373  persons  borrowed  because  of  sickness. 
43  persons  borrowed  because  of  death. 

95  persons  borrowed  for  home  expense,  as  repairs,  assessments,  etc. 
203  persons  borrowed  for  domestic  causes,  as  to  pay  debts,  buy  furni- 
ture, educate  children,  etc. 
66  persons  borrowed  to  meet  emergencies  brought  about  by  unem- 
ployment, bank-failure,  etc. 
201  persons  borrowed  for  miscellaneous  expenses,  as  debts,  moving 

expenses,  etc. 
105  persons  borrowed  in  connection  with  their  own  small  businesses. 
56  persons  borrowed  because  of  their  own  extravagance  or  dissipation 

or  that  of  others  in  the  family. 
16  persons  borrowed  to  make  good  on  bad  investments,  bad  manage- 
ment, etc. 

The  experience  of  the  National  Federation  of  Remedial  Loan  Asso- 
ciations is  to  the  same  effect. 

An  office  in  New  York  was  examined  as  to  its  2,444  loans  to  see  what 

4 


kind  of  men  and  women  borrowed  and  what  businesses  they  were  in.  The 
results  showed: 

Business  of  Employers  of  2,444  Borrowers 

U.  S.  Government,  353;  New  York  City,  553;  New  York 
County,  21;  New  York  State,  17;  manufacturing,  246;  mer- 
cantile, 289;  financial,  83;  insurance,  75;  newspapers,  146; 
railroads,  70;  steamship  companies,  II ;  express,  19;  telegraph 
and  telephone,  32;  oil  companies,  9;  real  estate,  22;  con- 
tracting and  building,  31;  warehousing,  11;  grocery,  32; 
tailoring,  40;  printing  and  publishing,  52;  public  utilities,  42; 
stationery,  10;  restaurant,  9;  medicine  and  surgery,  8;  no 
business,  16;  miscellaneous,  247. 

Positions  Held  by  2,444  Borrowers 

Clerks,  247;  post  office  employees,  245;  other  U.  S.  em- 
ployees, 95;  state  department  and  court  employees,  24; 
city  department  and  court  employees,  177 ;  New  York  County 
employees,  14;  fire  department,  198;  police  department,  114; 
proprietors  and  partners,  344;  managers,  67;  secretaries  and 
stenographers,  44;  foremen,  40;  agents,  33;  salesmen,  113; 
factory  operators,  81;  machinists,  34;  inspectors,  33;  tailors, 
39;  artisans,  24;  pressmen,  compositors,  etc.,  108;  teachers, 
18;  doctors  and  dentists,  15;  writers,  15;  telegraphers  and 
dispatchers,  18;  bookkeepers  and  accountants,  64;  conduc- 
tors, 3;  miscellaneous,  222. 

Other  investigations  verified  these  results.  A  mass  of  information  on 
this  subject  is  contained  in  the  Handbook  of  the  Legal  Reform  Bureau, 
pages  53-84. 

Governor  Cox,  of  Ohio,  has  said : 

"I  make  bold  to  say  the  legalized  loan  office  is  more  of  a  neces- 
sity in  an  industrial  community  than,  perhaps,  a  bank,  for  this 
reason;  it  is  the  poor  man  who,  when  he  needs  money,  needs  it 
worst." 

The  Massachusetts  House  of  Representatives'  Committee  on  Banks 
and  Banking,  in  its  admirable  report  on  the  small  loan  business  in  191 1, 
stated  that  it  found  many  persons  who  borrowed  because  of  necessity. 
See  Bureau  Handbook,  page  42. 

Clarence  W.  Wassam,  Ph.D.,  who  wrote  an  essay  on  the  business  in 
connection  with  his  work  at  Columbia  University,  New  York,  said: 

"The  necessity  for  borrowing  money  for  a  short  period  of  time 
is  as  old  as  the  money  economy  under  which  it  arises.  It  is  common 
to  the  man  of  large  and  of  small  means,  to  the  entrepreneur  in 
business  and  to  the  man  who  works  for  a  daily  wage."  (Bureau 
Handbook,  page  45.) 

5 


The  necessity  of  the  business  is  recognized  in  the  preambles  of  the 
laws  of  several  states.  Thus,  in  Virginia  (Laws  of  1918,  Chapter  402), 
"It  is  recognized  that  that  business  of  lending  small  sums  of  money  upon 
security  that  is  not  acceptable  to  banks,  does  and  will  exist  and  there  is  a 
real  need  for  the  enactment  of  a  law  that  will  enable  its  continuance 
under  proper  supervision." 

Judge  Frazer  of  the  Supreme  Court  of  Pennsylvania  in  the  case  of 
Pennsylvania  v.  Puder  said : 

"The  attempt  in  recent  years  to  eradicate  the  evils  of  the  so- 
called   "money  loan-sharks,"  by  proceedings  instituted  in  Phila- 
delphia and  Pittsburgh,  is  a  matter  of  general  public  knowledge, 
and  those  who  have  given  the  matter  close  investigation  and  thought 
concede  that  a  prohibition  of  the  business  does  not  accomplish 
the  desired  result,  and  that  the  only  practical  method  of  dealing 
with  the  subject  is  by  proper  regulation.     Our  legislature  in  a 
preamble  to  the  Act  of  191 5,  omitted  from  the  pamphlet  laws  but 
shown  in  the  certified  copy  of  the  act  from  the  office  of  the  Secre- 
tary of  the  Commonwealth,  recognizes  the  situation  and  the  imprac- 
ticability of  prohibiting  the  business  of  loaning  money  in  small 
amounts  and  the  need  of  regulation  and  supervision  by  law." 
Other  official  statements  recognizing  the  necessity  of  the  business  may 
be  found  in  Bulletins  of  the  Department  of  Public  Welfare  of  the  City 
of  Chicago,  for  November,  1916,  Vol.  I,  No.  4,  page  23. 

2.  The  Small  Loan  Business  is  Clean  Banking  Business  for  the  Lender. 

When  it  became  apparent  that  the  small  loan  business  was  a  neces- 
sity, it  became  obvious  that  the  only  constructive  solution  was  to  find  a  good 
substitute  for  the  loan-shark.  To  abolish  or  imprison  one  loan-shark  and 
not  provide  any  other  place  for  the  small  man  to  borrow  merely  meant 
that  another  loan-shark  would  take  his  place.  As  our  own  Massachusetts 
Committee  on  Banks  and  Banking  said  in  191 1 : 

"Your  committee  had  impressed  upon  it  that  money-hunger, 
either  the  hunger  of  necessity  or  the  hunger  of  wilful  extravagance, 
could  not  be  satisfied  by  pure  loan  laws  which  amounted  to  prohi- 
bition, any  more  than  food -hunger  could  be  gratified  by  pure-food 
laws  which  amounted  to  prohibition." 
Professor  Eubank,  Professor  of  Sociology  and  Dean  of  the  Y.  M.  C.  A. 
College  in  Chicago,  says: 

"Before  any  campaign  to  oust  the  loan-shark  can  be  effective 
there  must  be  some  agency  equipped  and  prepared  to  take  its  place." 
And  he  goes  on  with  these  incontrovertible  statements: 

"No  campaign  of  extermination  will  ever  succeed.  No  amount 
of  condemnation  will  ever  be  effective.  No  negative  laws,  however 
drastic,  can  permanently  relieve  the  present  abuses.  As  long  as 
we  have  citizens  who  want  to  borrow  money — and  we  shall  always 
have  them — so  long  will  some  loan  agencies  continue,  and  it  is  only 
the  better  kind  that  will  succeed  in  driving  out  the  worse." 


When  it  was  discovered  that  the  small  loan  business  consisted  of 
honest  men  and  women  who  borrowed  for  honest  reasons,  it  became  clear 
that  the  small  loan  business  was  nothing  more  or  less  than  small  banking 
business.  That  seems  clear  now  but  it  is  only  recently  that  it  has  become 
clear. 

And  then  came  the  next  step.  Why  should  not  honest  men  put  legiti- 
mate capital  into  the  business  and  place  the  whole  business  as  high  in 
public  esteem  and  confidence  as  the  banking  business  ? 

For,  as  Hon.  Edwin  R.  Cox  of  the  Pennsylvania  Legislature  has  said : 

"There  is  no  reason  why  a  small  loan  institution  cannot  be 
made  as  responsible  as  a  Federal  Reserve  Bank." 


THE  LICENSED  INDUSTRIAL  LENDER 

A.  Various  Substitutes  for  the  Loan-Shark 

To  take  the  place  of  the  old-fashioned  loan-shark,  three  types  of  offices 
have  come  into  being  (Cf .  Bulletin  Dept.  of  Public  Welfare,  City  of  Chicago 
for  Nov.,  1916,  page  31): 

(a)  The  purely  charitable  organization. 

(b)  The  cooperative  organization. 

(c)  The  straight  business  organization. 

1.  The  Charity. 

The  first  of  these,  the  charity,  has  played  only  an  insignificant  part  in 
solving  the  small  loan  problem  and  for  the  obvious  reason  that  the  average 
borrower  is  not  a  "dead-beat"  or  a  "bum."  Nine  times  out  of  ten  he  is  a 
self-supporting,  self-respecting  workman.  He  may  need  a  loan  just  as  a 
rich  man  or  a  merchant  may  need  a  loan  but  he  does  not  intend  to  be 
treated  as  a  pauper,  or  a  beggar,  or  as  an  object  of  charity.  The  average 
American  small  borrower  wants  to  go  to  some  reputable  place,  like  a  bank,  get 
a  loan  because  he  is  a  good  moral  risk,  pay  the  fair  rate  of  interest,  in  short 
to  have  it  a  straight  out  and  out  business  transaction.  (See  a  pamphlet  called 
"Why  the  Small  Loan  Business  is  Essential,"  published  by  People's 
Provident  Association,  Kentucky.) 

This  charitable  type  of  organization  may  have  done  some  good,  but  as 
a  permanent  solution  of  the  loan-shark  evil  it  has  had  only  a  small  part 
and  therefore  may  be  dismissed. 

2.  Credit  Unions. 

The  second,  the  cooperative  organization,  is  more  interesting.  The 
credit  union  is  the  best  example.  The  credit  union  movement  has  been  a 
great  success  in  Italy;  there  are  successful  credit  unions  in  the  United 
States,  but  it  is  a  fact  that,  generally  speaking,  the  credit  union  movement 
has  not  developed  as  rapidly  in  this  country  as  had  been  hoped. 

It  is  not  pertinent  here  to  inquire  whether  this  is  because  Americans 
take  slowly  to  the  cooperative  idea  or  what  the  trouble  may  be.  The  credit 

7 


union  has  much  to  recommend  it.    It  is  entitled  to  encouragement.    It 
may  ultimately  be  the  final  solution. 

But  for  all  present  and  practical  purposes  the  credit  union  alone  is  not 
an  adequate  substitute  for  the  loan-shark. 

There  are  not  enough  credit  unions  to  fill  the  need. 
The  Boston  Post  said  editorially  on  April  28,  1920: 

'The  credit  union  is  the  best  answer  to  the  small  loan  problem, 
and  it  would  be  a  complete  answer  if  there  were,  say  1,500  of  the  unions 
in  the  state  instead  of  60." 

To  increase  from  60  to  1,500  is  an  increase  of  2,600  per  cent.  That 
cannot  be  accomplished  overnight.  While  the  legislature  should  do  all  it 
can  to  encourage  the  credit-union  idea,  it  must  recognize  that  for  imme- 
diate, practical  purposes,  some  other  solution  is  necessary. 

3.   The  Licensed  Lender. 

That  solution  has  been  found  in  the  licensed  industrial  lender.  The 
licensed  industrial  lender  is  nothing  more  or  less  than  a  bank  which  makes 
small  loans  as  a  business  proposition. 

B.  Why  a  Special  Business  for  Small  Loans  ? 

The  industrial  lender  or  the  licensed  small-loans  office  has  been  the 
one  practical,  business-like,  effective  solution.  He  competes  with  the 
unlicensed  lender,  drives  him  out,  and  keeps  him  out. 

Some  persons  have  thought  that  there  ought  not  to  be  special  offices 
for  small  borrowers  and  have  said  the  banks  should  do  the  business.  Gov- 
ernor McCall,  of  Massachusetts,  urged  this  in  his  inaugural  address  in 
191 6.  A  newspaper  reporter  consulted  the  presidents  of  all  the  leading 
banks  in  Boston  and  stated : 

"Presidents  and  managers  are  of  one  opinion  in  this  matter. 
That  the  risk  is  too  great  in  many  cases,  that  separate  departments 
would  be  required  to  handle  the  business,  and  that  for  these  reasons 
there  would  be  little  or  no  profit  in  the  business  for  the  banks." 
(From  copy  of  article  on  file  in  Massachusetts  Supervisor  of  Loans' 
office.) 

Samuel  Spring,  Esq.,  in  an  article  on  Banking  published  in  the  current 
North  American  Review  says  this: 

"Modern  business  would  perish  without  the  free  use  of  credit. 
No  one  today  would  say  even  to  the  small  business  man — "neither 
a  borrower  nor  a  lender  be."  Yet  when  it  is  said  that  the  worker 
or  farmer  needs  a  small  loan  on  his  unsecured  note  and  is  forced  to 
go  to  the  loan-shark  because  no  bank  will  accommodate  him,  most 
bankers  conclude  that  a  thrifty  worker  does  not  need  to  borrow. 
It  serves  him  right,  is  the  verdict,  if  he  has  to  pay  a  grotesque  rate 
of  interest;  the  lesson  will  teach  him  thrift.  Yet  how  shallow  such 
a  conclusion  is.    Misfortune,  unemployment,  sickness,  the  needs  of 

8 


a  large  family — these  set  back  workmen  to  conditions  of  piercing 
need.  .  .  Moreover  there  are  seasonal  demands  upon  the  worker 
just  as  there  are  upon  the  farmer  or  the  business  man.  The  fall, 
with  the  need  of  storing  up  coal,  clothing  the  children  for  school,  and 
preparing  for  the  winter  represents  a  genuine  strain  in  the  great 
bulk  of  American  homes.  In  brief,  we  have  here  a  repetition  of  the 
familiar  credit  needs  of  modern  economic  life — only  on  a  Lilliputian 
scale." 

The  fact  remains  that  existing  banks,  both  urban  and  rural,  cannot 
handle  small  loans  at  a  profit  and  that  as  a  result  there  is  a  gap  in 
the  present  banking  structure. 

Very  recently  it  has  been  suggested  that  the  state  should  do  this  busi- 
ness. It  is  not  necessary  to  waste  time  or  space  pointing  out  that  this  is 
no  practical  immediate  solution.  On  this  point  Senator  John  Dailey,  of 
Illinois,  said  last  year  (Year  Book  of  American  Industrial  Lenders'  Asso- 
ciation in  1920,  page  71) : 

"I  am  going  to  sound  a  note  of  warning.  The  socialist  and  the 
demagogue  are  active.  The  socialists  are  asking  for  state  insurance 
and  the  state's  participation  in  private  business.  They  will  ask 
that  the  state  take  charge  of  the  lending  of  money.  See  if  they 
don't.  You  want  to  be  on  your  guard.  Your  business  is  a  private 
enterprise;  it  is  as  legitimate  and  proper  a  function  of  private  en- 
deavor as  any  other  class  of  business.  The  management  and  conduct 
of  purely  individual  and  private  business  by  the  government  itself 
is  the  socialistic  program,  no  matter  how  disguised  it  may  be,  no 
matter  whether  it  is  advocated  by  soap-box  orators,  parlor  socialists, 
or  bolshevistic  professors." 

It  is  clear  that  the  small  loan  business  is  akin  to  banking  business  but 
has  so  many  distinct  elements  that  it  is  most  wisely  conducted  as  a  distinct 
business. 

This  is  the  history  and  the  reason  for  the  existence  of  the  licensed 
small  loan  lender. 

C.  Public  Opinion  and  the  Licensed  Lender 

Wherever  the  licensed  lender  has  been  allowed  to  conduct  the  small 
loan  business  the  loan-shark  has  been  driven  out.  Where  licensed  lenders 
operate  there  are  no  complaints  about  extortion  or  usury  (Bureau  Handbook 
page  24).  _ 

There  is  only  one  reason  why  the  licensed  lender  has  not  driven  the 
loan-shark  out  of  every  state  in  the  Union.  That  reason  is  a  mistaken 
public  opinion.  Of  course,  the  loan-shark  rights  the  licensed  lenders  bit- 
terly; but  as  they  cannot  fight  in  the  open  and  are  forced  to  resort  to 
bribes  and  trickery,  they  have  been  given  short  shrift  by  state  legislators. 
Loan-shark  opposition  has  been  an  asset  in  the  campaign  to  have  the 
business  done  by  licensed  lenders. 

But  public  opinion,  here  and  there,  has  been  a  stumbling  block.    In 


some  states  there  has  been  a  carrying  over  of  the  old  attitude  of  hysteria 
and  false  sentimentality.  People  have  said :  Loan-sharks  were  in  the  small 
loan  business;  licensed  lenders  are  in  the  small  loan  business;  hence 
licensed  lenders  are  loan-sharks.  Upright  and  sincere  people  have  not 
troubled  to  get  the  facts  and  thus  they  have  confused  licensed  lenders  with 
loan-sharks.  This  confusion  in  the  minds  of  honest  people  has  been  the  one 
thing  which  has  saved  the  loan-shark  from  extinction. 

Hon.  Raymond  B.  Fosdick,  Chairman  of  the  Federal  Commission  on 
War  Camp  Community  Service  in  the  United  States  and  France  during 
the  world  war,  in  an  address  before  the  Academy  of  Political  Science,  New 
York,  November  n,  191 1,  stated: 

"  .  .  .  Our  main  obstacle  is  the  ignorance  of  the  virtuous.  It  is 
the  belief  that  banking  rates  of  interest  can  be  imposed  on  a  business 
which  is  conducted  without  security.  It  is  the  blind  opinion  that 
you  can  run  a  small  loan  business  at  6  per  cent  per  annum  and  make 
it  pay.  It  is  the  false  hope  that  laws  prohibiting  an  interest  in 
excess  of  6  per  cent  can  be  imposed.  Before  adequate  legislation 
can  be  had,  these  illusions  must  be  destroyed,  and  the  only  way  in 
which  they  can  be  destroyed  is  by  a  thorough  knowledge  of  the 
facts  brought  about  through  an  educational  campaign.  .    " 

In  1920  an  attempt  was  made  to  drive  the  loan-shark  from  Kentucky. 
The  drive  was  defeated  by  this  "ignorance  of  the  virtuous."  See  the 
Louisville  (Ky.)  Herald  for  February  11,  1920  (editorial)  and  the  Courier 
Journal  for  the  same  date  (editorial). 

The  rub  of  the  situation  is  this.  The  licensed  lender  goes  into  the 
small  loan  business  as  a  legitimate  enterprise.  He  is  a  straightforward 
business  man.  He  will  not  disobey  or  evade  the  law.  He  will  comply  with 
every  clause  of  the  law,  If  he  does  not  make  a  decent  profit  he  does  not  break 
the  law,  but  he  does  get  out  of  the  business. 

The  state  must  regulate  the  business.  That  is  agreed  on  all  sides- 
Regulation  involves  fixing  the  rate  of  interest  which  may  be  charged. 

That  is  the  difficulty.  If  the  rate  is  fixed  too  low,  the  licensed  lender 
loses  money  and  gets  out  of  the  business,  and  when  he  gets  out,  the  loan- 
shark  slips  back  in  again. 

Before  going  on  to  examine  what  the  fair  rate  must  be  it  is  essential  to 
nail  down  the  fact  that  the  licensed  lender  and  the  loan-shark  are  as  far 
apart  as  the  two  poles;  they  have  nothing  in  common,  they  are  irrecon- 
cilable foes,  where  one  exists  the  other  cannot.  They  are  as  distinct  as  a 
bank  is  distinct  from  a  bucket  shop. 

The  Chicago  Department  of  Public  Welfare,  November  (191 6)  Bul- 
letin, called  "the  loan-shark  number"  on  page  31  says  of  the  licensed 
lender  companies: 

"These  organizations  keep  within  the  law  and  so  are  not  to  be 
confused  with  the  loan-shark  whose  characteristic  is  that  of  usurious 
money-lending" 

10 


The  Superintendent  of  Banks  for  Ohio,  speaking  of  the  law  which 
made  it  possible  for  the  licensed  lenders  to  operate  in  Ohio,  said  (The  Loan- 
Shark  Evil,  Bulletin  published  by  the  Legal  Reform  Bureau  in  February, 
1919,  see  page  2) : 

"The  operation  of  the  restrictive  provision  of  the  law  has  re- 
sulted in  putting  out  of  business  many  money-lenders  who  had 
lived  by  the  unlawful  profits  of  their  investments.  Men  of  high 
character  and  correct  business  methods,  satisfied  with  the  lawful 
returns  upon  their  loans,  have  taken  their  place. 

"The  law  has  put  dignity  and  confidence  into  the  loan  business 
heretofore  unknown,  so  that  loan  transactions  stand  upon  the  same 
footing  as  other  business  transactions  and  neither  the  borrower  nor 
the  lender  has  anything  to  cover  up  or  be  ashamed  of." 

In  cities  where  they  have  offices,  the  licensed  lenders  are  esteemed 
members  of  the  local  chambers  of  commerce.  Their  national  association 
is  a  member  of  the  United  States  Chamber  of  Commerce. 

In  about  half  the  states  public  opinion  has  been  educated  and  under- 
stands that  the  licensed  lender  is  the  solution  of  the  loan-shark  problem. 
In  those  states  the  law  is  adequate. 

In  Massachusetts  it  would  seem  that  many  persons  still  are  confused 
in  their  minds,  for  the  Massachusetts  law  is  not  adequate  to  attract  suffi- 
cient loan  capital  to  adequately  supply  the  legitimate  demands  for  indus- 
trial loans  of  $300  or  less  in  even  the  larger  centers  of  population,  and  after 
all  these  years  most  of  the  towns  and  rural  communities  are  without  any 
legitimate  small  loan  service. 


ADEQUATE  LEGISLATION 

A.  The  Scientific  Rate 

The  vital  point  in  legislative  regulation  is  the  establishment  of  an 
adequate  rate. 

The  scientific  rate  is  now  known  to  be  j}4  per  cent  per  month. 
This  fact  is  most  simply  proved  as  follows: 

1.  The  two  national  remedial  organizations  interested  in  improving- 
the  small  loan  business  have  drafted  model  laws: 

The  Division  of  Remedial  Laws  of  The  Russell  Sage  Foundation  in 
its  "Uniform  Law"  fixes  the  rate  of  2>H  per  cent  per  month. 

The  Legal  Reform  Bureau  to  Eliminate  the  Loan-Shark  Evil  has 
also  fixed  the  rate  at  33^  per  cent  per  month  as  necessary  in  all 
the  circumstances. 


2.  All  states  which  have  enacted  or  amended  remedial  loan  laws  since 
191 6  have  established  the  3>£  per  cent  rate  or  its  equivalent  by 
supplementing  certain  fee  charges  to  the  interest  rate.  These 
states  are 


Arizona 

Indiana 

Virginia 

Connecticut 

Iowa 

New  Hampshire 

Georgia 

Maine 

Ohio 

Illinois 

Maryland 

Pennsylvania 

Michigan 

In  March,  1921,  the  3^  per  cent  law  was  enacted  in  Iowa,  the  vote 
in  the  House  being  unanimous  and  all  but  three  in  the  Senate. 

3.  The  3^  Per  cent  rate  is  endorsed  by  unimpeachable  and  unbiased 

sources. 

The  2>y2  per  cent  law  was  introduced  into  the  Connecticut  legislature 
in  1919,  with  the  endorsement  of  nearly  every  charity  in  the  state.  (Copies 
of  the  letters  of  endorsement  have  been  printed  and  a  set  has  been  given 
to  the  Senate  Chairman  of  the  Committee  on  Legal  Affairs.) 

So,  also,  in  Kentucky  the  3^2  per  cent  bill  was  sponsored  by  the  social 
agencies  of  the  state.  (A  set  of  copies  of  those  letters  of  endorsement  has 
also  been  given  to  the  Senate  Chairman  of  the  Committee  on  Legal  Affairs.) 

While  the  2>H  per  cent  battle  was  on  in  Kentucky,  telegrams  were 
sent  from  licensing  officials  of  Illinois,  Indiana,  Pennsylvania,  Connecti- 
cut, and  Maryland  stating  that  the  ^A  Per  cent  law  had  worked  well 
in  those  states.  (Copies  of  these  telegrams  have  been  given  to  the 
Senate  Chairman  of  the  Committee  on  Legal  Affairs.) 

Prof.  E.  E.  Eubank,  dean  of  the  Y.  M.  C.  A.  College  in  Chicago  says: 
11  It  has  been  determined  by  careful  studies  that  j}4  per  cent  is  as 
low  a  rate  as  can  be  made."  (First  Report  of  Department  of  Trade 
and  Commerce,  State  of  Illinois  (1918),  page  8.) 

Robert  W.  Sharp,  New  York,  author  of  "The  Chattel  Mortgage  Loan 
Business — The  Disease  and  the  Remedy,"  says: 

"The  rate  legalized  in  several  states,  namely  2>A  Per  cent  Per 
month,  is  equitable."  (Pamphlet  published  by  Legal  Reform 
Bureau,  February,  1919,  entitled  "Necessary  Rate  for  Small  Loans," 
see  page  8.) 

A  scientific  statement  setting  out  accounts  of  actual  loan  offices  may 
be  seen  in  the  1919  Year  Book  of  the  American  Industrial  Licensed  Lenders' 
Association,  page  38. 

See  also  the  Bureau  Handbook,  pages  114-118;  also  pamphlet  on 
"Why  a  Higher  Rate?"  etc.,  by  C.  S.  Francis,  published  in  19 19,  by  Legal 
Reform  Bureau. 

4.  The  2>A  per  cent  rate  has  been  stated  to  be  the  scientific  rate  by  the 

metropolitan  newspapers  of  Massachusetts. 

12 


The  Boston  Herald  said  editorially  on  April  23,  1920: 

"The  Law  today  allows  the  lender  to  collect  interest  at  the  rate 
of  3  per  cent  on  loans  of  less  than  $300.  To  advance  this  charge  by 
y2  per  cent  is  said  to  conform  to  the  results  obtained  by  an  extensive 
survey  of  the  business  covering  many  American  cities;  3^  per  cent 
is  found  to  be  the  scientific  rate.  .  .  the  measure  ought  to  be  restored 
by  amendment  to  its  original  form." 

The  Boston  Post  said  editorially  on  April  22,  1920: 

'The  present  law  permits  a  charge  of  3  per  cent  on  loans  under 
$300.  The  ostensible  purpose  of  the  new  bill  is  to  allow  an  increase 
to  sH  per  cent  a  month  on  such  loans.  There  seems  to  be  no  objec- 
tion to  that  for  it  has  been  demonstrated  by  careful  experiment  in 
various  parts  of  the  country  that  3^/2  per  cent  is  the  'scientific  rate' " 

The  Boston  Evening  Transcript  said  editorially  on  April  21,  1920: 

"An  increase  from  3  to  3^2  per  cent  a  month  as  the  authorized 
interest  charge  would  meet  all  reasonable  requirements." 

The  Boston  Evening  Record  said  editorially  on  April  21,  1920: 

"The  legal  rate  on  small  loans  in  this  state  has  been  3  per  cent. 
Experience  has  suggested  that  this  is  too  low  for  brokers  to  do 
business  at  a  profit.  An  increase  to  3^  per  cent  was  petitioned  for. 
No  objection  was  registered  against  this  petition.  .  .  . 

"The  2>lA  Per  cent  rate  is  established  in  Connecticut,  Maine, 
Pennsylvania,  Illinois,  Indiana,  Maryland,  Georgia,  and  Iowa. 
It  is  believed  to  be  adequate.  In  the  light  of  such  evidence  at  hand 
the  legislature  might  properly  grant  the  proposed  increase  from  3  to 
3l/2  per  cent  here." 

The  Boston  American,  on  April  22,  1920,  featured  a  news  story  based 
on  an  interview  with  Walter  S.  Hilborn,  Esq.,  and  saying  that  the  3^ 
per  cent  rate  was  proper  but  that  any  higher  rate  was  improper. 

B.  Comment  on  the  3V2  Per  Cent  Rate 

When  it  is  stated  that  the  legal  rate  cannot  be  fixed  lower  than  3K 
per  cent  per  month  or  42  per  cent  per  year,  that  rate  sounds  high  to  the 
man  who  can  step  into  a  bank,  put  up  collateral  and  get  his  loan  at  6-7-8 
per  cent  per  annum. 

There  are  three  big  differences  which,  after  a  little  reflection,  are  clear: 

1 .  The  risk  involved  in  the  small  loan  is  much  greater.  The  small  loan 

is  a  personal  risk.   The  bank  loan  is  against  collateral  or  business 
assets. 

2.  The  licensed  lender  cannot  charge  the  borrower  for  the  expenses  of 

the  loan,  whereas  the  banks  can  and  do.    The  loans  are  for  sub- 
stantial sums  falling  due  at  one  time. 

13 


A  savings  bank  lends  on  a  real  estate  mortgage.  It  looks  up  the 
title.  It  charges  the  borrower  with  the  lawyer's  bill  for  examining 
title  or  title  company's  fees  for  insuring  title.  The  loans  are  for 
large  sums.  A  licensed  lender  lends  on  character.  He  looks  up 
the  borrower's  reputation,  employment,  etc.  He  cannot  charge 
the  borrower  with  that  expense.  The  loans  are  for  small  sums 
repayable  on  weekly  or  monthly  instalments  for  about  a  year. 

The  j}4  per  cent  rate  is  fixed  to  include  both  interest  and  all  expenses. 

3.  In  proportion  to  the  amounts  loaned,  the  percentage  of  cost  of  con- 
ducting loans  business  is  far  greater.  Suppose  it  costs  a  bank  $10 
to  make  a  $1,000  loan  for  three  months.  At  6  per  cent  the  bank 
received  $15.00  and  makes  a  profit  of  $5.00. 
It  costs  just  about  as  much  to  hand  a  hundred  dollar  bill  out  to  a 
borrower  as  a  thousand  dollar  bill.  Rent,  overhead,  bookkeepers' 
wages,  stenographers'  wages,  stamps,  telephone,  stationery  are 
all  about  the  same  in  the  small  loan  office  as  in  the  bank.  But 
suppose  the  cost  is  only  $9.00  (10  per  cent  cheaper  than  the 
bank).  At  3^2  per  cent  the  licensed  lender  gets  $10.50  for  the 
three  months'  interest  on  $100.  His  profit  is  only  $1.50.  This  is  a 
profit  on  his  capital  of  just  6  per  cent  per  annum.  As  all  costs  are 
included  in  the  rate  fixed  by  law,  the  rate  obviously  must  be  high 
enough  to  include  and  cover  all  legitimate  costs. 

C.  The  Practical  Answer  of  Experience 

After  all,  practical  experience  is  a  better  guide  for  legislative  action 
than  mere  theoretical  reasoning  by  persons  without  actual  experience. 

The  practical  experience  in  a  score  of  states  is  this :  (Cf .  Bureau  Hand- 
book, page  24) 

When  the  rate  is  3>£  per  cent  the  small  loan  business  is  done  by  licensed 
lenders  who  employ  clean  methods  only;  there  are  no  loan-sharks;  there 
are  no  complaints  of  oppression,  and  licensed  lenders  cooperate  with  the 
officials  in  policing  the  business. 

When  the  rate  is  substantially  lower  than  3^  per  cent,  the  licensed 
lender  cannot  enter  or  stay  in  business,  so  the  loan-shark  takes  the  licensed 
lender's  legitimate  place,  exorbitant  interest  and  fees  are  charged;  the  loan 
business  is  done  secretly;  the  provisions  of  the  loan  law  are  generally 
violated ;  there  is  inadequate  capital  available  for  loan  service. 

In  Alabama  the  legal  rate  of  interest  allowed  was  fixed  at  ^  per  cent 
per  month.  A  license  fee  of  $2,000  per  annum  is  required.  No  licensed 
lender  could  do  business  under  these  conditions.  The  loan-sharks  do  all 
the  business  and  charge  40  per  cent  per  month.  (See  Welfare  Bulletin  of 
the  City  of  Chicago  for  November,  1916,  page  1 1.) 

In  Colorado,  where  the  legal  rate  is  1  per  cent  per  month,  the  law 
cannot  be  enforced.  There  is  no  licensed  lender  in  the  state;  the  loan- 
sharks  charge  what  they  please,  which  includes  recompense  for  their  risk 
of  violating  the  criminal  sections  of  the  law.  Therefore  the  law  makes  a 
bad  condition  worse. 

14 


In  Illinois,  before  the  $}4  per  cent  law  was  adopted,  the  legal  rate  was 
7  per  cent  and  the  result  was  that  only  loan-sharks  did  the  business.  (See 
Chicago  Department  of  Welfare  Bulletin,  pages  II,  12.)  When  the  3>2 
per  cent  bill  was  before  the  Illinois  legislature  in  191 7,  U.  S.  Judge  Kenesaw 
M.  Landis  wrote  as  follows  (See  First  Report  Department  of  Trade  and 
Commerce,  State  of  Illinois,  page  6) : 

"Dear  Senator  Austin:  I  have  been  asked  to  write  to 
you  about  a  bill  to  regulate  loan  agencies.  Such  judgment 
as  I  have  is  the  result  of  what  I  have  learned  during  my  ser- 
vice on  the  bench. 

"Of  course  this  (?>£  per  cent)  seems  a  tremendous  rate  of 
interest  for  money  but  we  are  dealing  with  a  very  practical  ques- 
tion. The  loans  are  small  in  amount  and  extend  for  a  short 
period  of  time  in  view  of  which  it  is  my  judgment  that  a  3^ 
per  cent  per  month  rate  is  a  just  rate. 

"At  all  events  it  certainly  is  better  than  20  per  cent  a  month 
which,  unless  you  gentlemen  do  something,  will  continue  to  be 
exacted."  Very  truly  yours, 

Kenesaw  M.  Landis 
The  Chicago  Tribune  said : 

"Forty- two  per  cent  a  year  sounds  usurious  but  we  must  remem- 
ber that  we  are  confronted  with  a  condition,  not  a  theory,  and  that 
the  present  condition  is  ten  times  or  more  worse  than  the  proposed 
remedy.  Loaning  on  wages  is  a  precarious  occupation  and  high 
rates  of  interest  are  necessary." 

In  Kentucky  the  legal  rate  of  interest  was  and  is  6  per  cent.  The  loan- 
sharks  thrive  by  charging  generally  a  rate  of  300  per  cent  per  annum.  In 
1920  a  drive  was  made  to  get  the  scientific  rate  of  3>£  per  cent  per  month. 
Many  good  people  in  the  state  thought  that  too  high,  and  opposed  it,  and 
by  so  doing  kept  their  state  in  the  hands  of  the  loan-sharks  and  deprived 
the  public  of  decent  and  fair  small  loan  service. 

The  Kentucky  Conference  of  Social  Work  appointed  a  Committee  on 
the  small  loan  business.  In  a  printed  document  called  "Smashing  the 
Loan-Shark"  (See  page  2,  127)  the  Committee  states  that  the  rates  charged  in 
Kentucky  for  small  loans  were 

I5  1°   50  per  cent  a  month. 
185  to  600  per  cent  a  year. 
The  Louisville  Herald  for  February  II,  1920,  put  the  thing  in  a  nutshell 
when  it  said  editorially: 

It  is  not  a  question  of  6  or  10  per  cent  versus  42  per  cent  but  of 
42  per  cent  versus  1,000  per  cent.  And  that  is  a  tremendous,  a  liberating 
influence. 

Revised  February,  IQ22. 

60  State  Street,  Boston,  Mass. 

Published  by  the 

American  Industrial  Lenders'  Association 

Harrisburg,  Penna. 

15 


^^  -   ASSESSED  FOKfi  DUE.  THE_ r       urTH 

OVE^|% 


Photomount 

Pamphlet 

Binder 

Gaylord  Bros. 

Makers 

Syracuse,  N.  Y. 

PAT-  JAN  21,  1908 


&§££»   ■'■'. 


YC  23783 


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565790 


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